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OIL FUTURES: Oil rallies as market eyes OPEC+ response to coordinated global SPR release

Highlights

US to release 50 million barrels from SPR

Market eyes OPEC+ response

Strong US dollar, pandemic risks add headwinds

Crude oil settled higher Nov. 23 as the market looked toward a possible response from the OPEC+ producer bloc to a coordinated release of strategic reserves from major oil consumers.

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NYMEX January WTI settled $1.75 higher at $78.50/b and ICE January Brent climbed $2.61 to $82.31/b.

The US will release 50 million barrels from the Strategic Petroleum Reserve in the coming months alongside releases from other major oil-consuming countries, the White House announced Nov. 23 as the Biden administration grapples with high domestic gasoline prices and record inflation.

The release includes 32 million barrels that will be exchanged "over the next several months" and returned "in the years ahead," in addition to 18 million barrels sold in the coming months that were already required by Congress to be sold by the end of 2022.

NYMEX December RBOB rallied 7.70 cents to $2.3372/gal and December ULSD finished up 5.89 cents at $2.3843/gal.

The release is "not delivering what some people were hoping for," OANDA senior market analyst Ed Moya said. "The Biden Administration is clearly showing that it will fill up reserves in next few years, so this is a temporary solution that allowed energy traders to go ahead and pretty much say this is the bottom for oil price."

Market focus is now likely to shift to OPEC+, Moya said: "OPEC+ is going to do whatever they can to keep prices supported here, if not higher. We will probably see them scale back output increases."

The OPEC+ alliance is scheduled to meet Dec. 2 and is expected to extend its policy of raising output 400,000 b/d in January. But delegates told S&P Global Platts on Nov. 22 that the group could reassess its options if consuming countries release barrels from their strategic reserves.

The US is joined by India, the world's fourth largest oil consumer, which announced Nov. 23 it would sell 5 million barrels of crude from its reserves, and by the UK, which also said Nov. 23 it would add 1.5 million barrels to global markets.

The White House said China, Japan, and Korea have also agreed to liquidate reserves in a coordinated effort to ease highs prices but did not provide details.

S&P Global Platts Analytics said any immediate price impact would likely be felt in US Gulf Coast differentials, steeper on LLS or Mars benchmarks, depending on the quality of the crude released.

"Markets are already off their peaks from October, with part of the decline likely due in part to the threat of SPR releases," said Paul Sheldon, chief geopolitical adviser for Platts Analytics.

"Any further impact of an actual SPR release will not be sustained, as balances would not change dramatically and OPEC+ would be less inclined to increase its production," Sheldon said. "But the largely unprecedented price-related release could serve to establish a new short-term ceiling and become a catalyst for a fresh wave of selling, given coronavirus-related demand uncertainties."

Brent and WTI hit six-week lows on Nov. 19, declining 9% and 10%, respectively, from their Oct. 26 peak. While this selloff was due in part to the White House telegraphing the SPR release, oil markets face a number of growing headwinds.

The US Dollar, which is typically inversely correlated with crude, has rallied around three percentage points since mid-October amid growing consensus that the US Federal Reserve will pivot away from its current dovish policy stance to blunt rising inflation. The ICE US Dollar has climbed to around 96.5 this week

Meanwhile, pandemic-driven risks to demand outlooks continue to stalk the market. Austria on Nov. 22 began a nationwide lockdown in a bid to head off record high number of new cases. The move comes amid fast rising case numbers across much of western Europe and could herald a wider return of lockdowns that could further blunt demand.